A Quick Guide to Title Insurance for California Real Estate Investors

Purchasing real property is a major investment, not only of money but also of risk. Even if a California real estate investor has enough cash on hand to pay the full price without a mortgage loan, they are still bound by property taxes, land use restrictions, and market forces. Most purchasers of real estate already know about these risks, though. A lesser-known risk involves defects, omissions, or fraud in the property’s title. This can lead to problems that are difficult to foresee, such as claims to the property by a former owner’s previously unknown heir, or difficulty in establishing ownership because of a defective deed. Title insurance covers many of these potential issues. Lenders often require borrowers to obtain title insurance policies in order to protect their investments. California’s laws and practices regarding title insurance can be rather difficult to understand at first.

What Is Title Insurance?

Title insurance protects property owners and lenders against unforeseen losses caused by title defects in the property’s history. These might include errors or omissions in a deed, forgery of documents, unresolved liens, or missing or unknown heirs. If, for example, a previous owner of the property forged a spouse’s signature on a deed, that spouse could claim a continued interest in the property. If a property was transferred as part of a probate proceeding, an heir who was left out of the process could make a claim. The current owner of the property could be caught entirely unaware of any problem with the property. Even if the claim lacks any legal merit, they would still have to incur expenses to defend against a claim. Title insurance covers owners and lenders in situations like these.

California has two types of title insurance policies. The California Land Title Association (CLTA) policy covers property owners against potential losses. The policy promulgated by the American Land Title Association (ALTA) offers extended coverage to lenders, who have an interest in the property by virtue of a lien securing the mortgage loan. Both policies involve a one-time payment of a premium, usually at the closing of the sale. The CTLA policy covers the period of time during which the buyer owns the property, while the ATLA policy applies to the period of time from closing until the loan is paid off.

When Do I Need Title Insurance?

Lenders will almost always require title insurance on real estate purchases as a condition of issuing a loan. If an investor is paying cash for a property, they should still seriously consider obtaining a policy.

How Much Does Title Insurance Cost?

While some states set standard title insurance rates by statute, rates may vary from one insurer to another in California. This often depends at least partly on the services provided by the title company. In Southern California, some title companies provide escrow and closing services in addition to issuing title insurance policies, while others only issue policies. Some title companies may offer discounts in various circumstances. Comparison shopping is a good idea for real estate investors.

Who Pays for Title Insurance?

The ultimate choice of title company usually belongs to the party paying for the policy. Local practices may dictate who pays the premiums. In Southern California, the seller typically pays the premiums for both the owner’s and the lender’s policies, but the parties can negotiate different arrangements. If the buyer is paying all or part of the premium, federal law prohibits the seller from requiring them to use any particular title company.